We recently spoke to a senior investment manager about his approach and he noted how a significant chunk of portfolio holdings are quoted on London's AIM market.
There are times when forces align. There is unprecedented focus on healthcare development because of COVID-19; the pandemic has also upended retail; Brexit is prompting the UK to try and attract inward investment, and rich US equity valuations mean that American investors are increasingly interested in foreign opportunities.
So step forward Randy Baron, a portfolio manager at New York-based Pinnacle Associates, an RIA with more than $7 billion of client money. A striking feature of his investments is that a large chunk of them are British.
US-based firms are eager to enter London’s Alternative Investment Market, aka AIM, because the user requirements for this UK exchange are less onerous than, say, the NASDAQ market. This creates opportunities and explains why some AIM-listed firms are among a significant part of Baron’s portfolios, he told Family Wealth Report in a recent call.
The fact that the UK is still relatively light in tech listings vs the US means that there are inefficiencies and opportunities to be exploited in the UK, Baron said. And AIM has zero tolerance for leverage, whereas there can be leverage on the NASDAQ, he said.
“10 years into a bull market…do you really want to be in a leveraged position? It’s not even a debate!” said Baron.
Especially since these AIM-listed US companies often eventually seek US dual listings, in many ways London is becoming the “Minor Leagues” for eventually going public in the US. Because of his exposure and experience in UK investing, Baron said that he is often the first public investor visitor for companies choosing this path.
The UK’s departure from the European Union has left uncertainties about the degree of access UK-based financial firms have to the EU’s Single Market. (Switzerland has the same issue.) In that environment, London’s famed “City” financial hub has had to make itself more attractive internationally to compensate for added protectionist costs which its European neighbours have erected. And the easier AIM listing environment appears to be part of the fightback. There is still work to do, however. In February this year, a report by the former WorldPay chief executive Ron Kalifa called for changes to UK stock market listing rules to stop fintech companies being lured to float in bases such as New York, Paris or Frankfurt (Guardian, February 26, 2021). Changes could include introducing dual-class share structures, which give founders more control over their business after an initial public offering (IPO), and dropping the minimum number of shares that must be made available to 10 per cent.
Baron is lead portfolio manager of Pinnacle’s international and global products and responsible for the firm’s overall international investment strategy. His strategy is industry and sector agnostic and open to compelling ideas under $5 billion in market cap anywhere in the world. Baron said that he likes to invest in companies with resilient and recurring revenues, durable competitive advantages, unrecognized growth potential, and superior, aligned management teams.
Modern healthcare and medical businesses are among the kind of firms Baron likes. He gave the example of Amyris ((NASDAQ:AMRS), a synthetic biotech and renewable chemical company. It has risen sharply, having once been a penny stock. Baron said he likes to hold firms for an average of three to five years, or longer.
“My kids are going to hold these stocks….that is how I view this,” Baron said.
“The 21st Century is going to be a century of biology,” he said.
The pandemic has also accelerated changes in retail, favoring click-and-deliver services such as Amazon and thousands of peers.
An example – and another British firm – is Naked Wines [London: WINE], an online retailer of wine with operations primarily in the US, UK and Australia. Lockdowns obviously rapidly drove online sales, and the company’s revenues grew 90 per cent. Baron said he liked the business model of having direct relationships with vineyards that can translate into more customized product offers and discounted prices for Naked Wines’ customers. As economies reopen, Baron does not expect online wine sales to stay at last year’s much higher levels. However, he does think that this is a case where consumer adoption has accelerated, that a material share of the increased online buying will stick, and that Naked Wines will be a clear beneficiary.
Shifting gears slightly, but staying on the UK side in Baron’s favor, is Victoria Plc. This is an international manufacturer of carpets, underlay and ceramic tiles. (It supplies all the carpeting and flooring for Buckingham Palace.) Baron said the company was well positioned to benefit from a post-pandemic recovery in general economic activity and home-improvement spending. It also has a significant longer-term runway for growth from leading the roll-up of a still very fragmented flooring industry in Europe.
So how he is doing? Well, in the first quarter of 2021 his fund was up 80 per cent. In the second quarter of 2020, he was the #1 ranked manager globally among international small cap funds with an overall quarterly return of over 56 per cent, he said.
Baron also runs Pinnacle’s “Turnaround Strategy,” which plays on the thesis that sometimes high-quality businesses fall (temporarily) out of favor, and he serves as a member of the investment committee for the firm’s All-Cap Strategy.